HEIRS OF AMANDO DALISAY, REPRESENTED BY JUANITA VDA. DE DALISAY, NOEL E. DALISAY, EDWIN E. DALISAY, ROSINA DALISAY TRINIDAD, ERIC E. DALISAY, DENNIS E. DALISAY AND JOHNNY DALISA…

Heirs of Dalisay versus Gupit

The Case

This is a petition for review on certiorari of the decision and the amendatory resolution of the Court of Appeals in a lease dispute. The heirs of the late Doctor Amando Dalisay, as lessors, are ranged against Fortunato Gupit, the lessee, who insisted on extending a fifteen-year lease for another five years over the objection of the lessor's administratrix. The case matters because it is the Supreme Court's own vehicle for applying the new rule of Fernandez versus Court of Appeals: a lease clause allowing extension only upon the mutual agreement of the parties cannot be stretched into a unilateral option in favor of the lessee. It is, in short, a lesson in how to read a contract by all its words, in context, and not by a single word standing alone.

Procedural History

Gupit filed a complaint for specific performance and damages before the Regional Trial Court of Manila, Branch One. The trial court dismissed the complaint. It held that the lease contract was clear and unequivocal, that its provisions must be applied according to their literal meaning and respected as the law between the parties, and that any extension of the original fifteen-year term for another five years could only be made by mutual consent of the parties and under such terms and conditions as they may mutually agree upon. The trial court went further and ordered Gupit to render an accounting of guaranty deposits and rentals collected from the building tenants from November 1, 1986 onward and to deliver them to the lessors, to pay moral and exemplary damages of 5,000 pesos, and to pay attorney's fees and costs of 15,000 pesos. It also directed the clerk of court to release to the lessors the rentals consignated by Gupit and those deposited by the intervenor tenants.

Gupit appealed to the Court of Appeals, questioning the refusal to allow the extension. The Court of Appeals reversed the trial court, relying on the old rulings in Koh versus Ongsiaco and Cruz versus Alberto, and declared that the lessor cannot unilaterally terminate a lease made extendible upon mutual agreement, nor refuse the extension without the lessee's consent. On reconsideration, the Court of Appeals issued an amendatory resolution directing the trial court to receive evidence on the just and equitable monthly rental for the extended five-year lease and on the total rentals the lessors had collected from the building tenants, and to order their delivery to Gupit. The lessors then came to the Supreme Court by petition for review on certiorari.

Facts

On March 15, 1971, Doctor Amando Dalisay leased to Fortunato Gupit a parcel of land at the corner of Aurora Boulevard and Balete Drive in Quezon City. The lease was for fifteen years, extendible for another five years, and it stipulated that Gupit would construct a building on the land which would become the lessor's property upon expiration of the lease. Gupit built the FMSG Building, leased its spaces to various tenants, and paid a monthly rental of 1,500 pesos, which after Doctor Dalisay's death was paid to his heirs.

Before the lease expired on October 31, 1986, the administratrix, Juanita Vda. de Dalisay, notified Gupit that the lease would not be renewed. Gupit gave notice that he would exercise his option to lease for another five years and offered a higher monthly rental of 4,800 pesos. The administratrix stood firm, notified him that the heirs would take possession of the land and exercise ownership of the building beginning November 1, 1986, and that the heirs would collect rentals from all the building tenants from that date. Because she refused to accept his payments, Gupit consignated the rentals in court, and the tenants jointly filed a complaint in intervention.

The pivotal stipulation of the lease contract, paragraph 7, reads:

7. Before the end of the 15th year, the parties of this contract may extend the lease for another five (5) years after the 15-year lease under such terms and conditions that they may mutually agree upon, with due consideration to any changes in the value of the peso.

Issues

• Whether or not the lessee may unilaterally extend the lease for another five years under a stipulation that the parties may extend it under such terms and conditions as they may mutually agree upon.
• Whether or not the Court of Appeals correctly relied on the rulings in Koh versus Ongsiaco and Cruz versus Alberto in interpreting the word extendible.

Applicable Provisions

The decision turns on the construction of the contractual stipulation quoted above, paragraph 7 of the lease contract, which provides:

7. Before the end of the 15th year, the parties of this contract may extend the lease for another five (5) years after the 15-year lease under such terms and conditions that they may mutually agree upon, with due consideration to any changes in the value of the peso.

This clause is the whole battleground: its words "may extend" and "mutually agree upon" are what defeat the claim of a unilateral option.

Ruling

On the first issue, the Court held that Gupit cannot unilaterally extend the lease without the consent of the lessor heirs. The Court acknowledged that the Court of Appeals would have been correct had the old rulings applied, but those rulings had been overruled in Fernandez versus Court of Appeals, promulgated on October 18, 1988. The new rule is that a stipulation providing for extension of the lease period, where the terms and conditions are subject to the mutual agreement of the lessor and the lessee, means the lease may be extended only upon mutual agreement, not at the option alone of the lessee or even of the lessor.

On the second issue, the Court explained why Koh and Cruz no longer control. Those cases, the Court said, read too much into a single word, treating extendible as if it said extendible at the option of the lessee alone, all other terms unchanged. The Court stressed that the important task in contract interpretation is always the ascertainment of the intention of the contracting parties, discharged by looking to all the words they used, in context, not a particular word or two standing alone. It added that in a reciprocal contract like a lease, the period is deemed agreed upon for the benefit of both parties, absent language showing the term was deliberately set for one side alone, and that in an era of volatile costs and currency fluctuations, very specific language is necessary to show an intent to grant a unilateral faculty to extend.

Doctrine

A lease stipulation allowing extension under such terms and conditions as the parties may mutually agree upon may be extended only by mutual agreement, not at the option alone of the lessee or the lessor. The words extendible and renewable carry no sacramental significance; they are non-committal and do not by themselves answer who holds the option or what the terms of the extension shall be. Contract interpretation looks to all the words of the contract, in context, to ascertain the intention of the parties. In a reciprocal contract like a lease, the period is presumed agreed upon for the benefit of both parties, and very specific language is required to establish a unilateral right to extend.

Disposition

The Court reversed and set aside the decision and resolution of the Court of Appeals and reinstated the judgment of the trial court, so the lessor heirs prevailed.

Remember This

Memorize this line: a lease extendible only upon mutual agreement cannot be extended by the lessee alone, for extendible is not a unilateral option. Examiners use this case to test contract interpretation by all words in context, and to test whether you know that Koh and Cruz were overruled by Fernandez.